2016 Edition - Small Life Changes Make a Big Difference - 9 Easy Ways to Reduce Your Tax Bill Series
Over the next weeks we are going to provide you 9 easy ways to reduce your tax liability - 2016 Edition. Every Monday and Wednesday we will be posting a new tip, so stay tuned!
Tax Tip #1
The first tip to reduce your income tax bill is this: realize that the IRS changes the tax code, and has rules that “phase in” or “phase out”. The IRS often has specials- almost like the special of the day at your favorite diner- that are temporary and have an expiration date. They also, as needed, amend the tax code and change it mid-year depending on the economic circumstances that are driving the need.
For instance, in 2008, the mileage allowance for reimbursement was 50.5 cents per mile from January 1, 2008 to June 31, 2008; but as gas prices skyrocketed; they changed to 58.5 cents per mile from July 1, 2008 through December 31, 2008. Why is it important to understand this? People tend to think of their past experiences as a permanent condition. They also view things that have happened to their siblings or parents, in regard to income taxes, as permanent. The tax code is a moving, changing document. For example, many people think, “Well, I've never had enough to itemize, so I'll just take the standard deduction again this year.” Because of that mind set, they may forget some of the components that go into the calculation and not realize that they could get extra tax savings because of a single event or number of small events.
For example, “Mary Jones,” 66 years old, carefully kept track of her medical expenses and taxes for several years. Each year, she would present them to her CPA, only to have him say that itemizing those expenses was a “waste of time,” and to take the standard deduction rather than to itemize especially now that the calculation has been increased to 10%. Mary didn’t consider the many things that had occurred since the last time she had tried to itemize when she was 62 years of age:
At 62, she was working and earning more W-2 wages, so the now 10% threshold that she had to beat in order for itemization to work was much greater.Now, Mary was retired, and had a part-time job.
Also, her employer, at the time that she was fully employed, was paying 75% of her health insurance premiums. Since then, she had gone to the part-time job and had lost her employer-paid health insurance.
She had enrolled in Medicare Part A and had enrolled in Medicare Part B, which was deducting $104.90 per month from her Social Security check.She had also enrolled in Medicare Part D, which was also deducted from her Social Security. She didn't write premium checks directly to companies, so she didn't think of the dollars being deducted from her Social Security by the government as money she had spent.
She had purchased long-term care insurance and several years later purchased a new car, carrying with it a steep excise tax.
She had substantial increases in her home's property tax and at her winter residence property tax, a small mobile home in a park in Florida.
Overall, on examination, we realized that at age 66, Mary was over $1,300 above the standard deduction and had been missing substantial tax savings, because of what a CPA had told her four years previous! Moreover, she hadn't thought about how many little things had changed in her life.